Churchill and the Welfare State

A number of people have flagged for my attention and comment the American Scholar article that Scott placed in our “Picks” section the other day, George Watson’s “The Forgotten Churchill.” The subtitle tells it all: “The man who stared down Hitler also helped create the modern welfare state.” This is a familiar trope usually of people who are trying to make mischief among Churchill’s conservative admirers, and otherwise stir up the pot.

At first glance Watson’s article appears to be in this mode, noting that Churchill’s legacy as a social reformer has been forgotten “except by professional historians.” That seems a fair comment; the best treatment of Churchill’s domestic policy record, Paul Addison’s terrific study Churchill on the Home Front, is sadly out of print. And Watson’s short article is superficial in some ways—there’s a lot more to be said about the subject, even in a brief article, than he does. But he gets some very big things right. Churchill in his early parliamentary career saw social insurance as a bulwark against socialist revolution, a view he shared in common with Theodore Roosevelt, among others. As Watson rightly observes,

socialism and state welfare are old enemies, and welfare overspending is a characteristic of advanced capitalist economies. Nobody doubts that California is capitalistic, and its public debt is notorious; the People’s Republic of China, by contrast, is a major creditor in international finance. When the two Germanies united after 1990, the social provision of the capitalist West was more than twice that of the socialist East, and the cost of unification to West Germany proved vast.

This is where Watson could have gone further. While Churchill supported social insurance, he never favored social engineering, which has been the dominant impulse of the Left for a long time now. He never thought government planning could be smarter than the marketplace. In fact, as early as 1908 Churchill was warning against central planning in terms that anticipated Hayek’s famous critique of the “knowledge problem” 40 years later:

I reject as impracticable the insane Socialist idea that we could have a system whereby the whole national production of the country, with all its infinite ramifications, should be organized and directed by a permanent official, however able, from some central office. The idea is not only impossible, but unthinkable. If it was even attempted it would produce a most terrible shrinkage and destruction of productive energy.

Indeed, in 1929 Churchill contemplated writing a book on socialism to be called The Creed of Failure. He went as far as to outline the first five chapters, but abandoned the project when his publishers were unenthusiastic.

Moreover, Churchill was never a class war egalitarian. “The idea that a nation can tax itself into prosperity is one of the crudest delusions which has ever befuddled the human mind,” Churchill once remarked. Even more applicable, Churchill was an early supply-sider!

When Churchill became chancellor of the exchequer in 1925, one of his first proposals was a cut in the “Super-tax,” which were high tax rates enacted on upper income individuals during World War I. Churchill did not claim, as some supply-siders did in the early 1980s, that income tax cuts would generate an increase in revenue, but he did speak in clear tones about incentives and economic growth. “I believe that the Super-tax at its present rate constitutes an excessive burden both on enterprise and on the saving power of the nation,” he said in his first budget speech in the House of Commons, “and that it is an impediment to the creation of that new wealth without which our present load of debt and expenditure cannot be borne.” Although Keynesianism had not yet become the dominant doctrine, Labour Party figures argued there was no connection between tax rates and economic performance. Churchill argued, as Reagan would argue when his tax cuts came under attack, that tax cuts needed a period of years to work:

I believe most firmly that the rate of direct taxation upon income was producing a chill and a check upon the enterprise and upon the conceiving energy of the country to an extent certainly far higher than in any other country in the world, and far more heavy in its effect than in any other country in the world. Yet this country, where direct taxation has reached unprecedented and unparalleled dimensions, is also, we find, the country where, at the other end of the social scale, this extraordinary phenomenon of unemployment has manifested itself in the most distressing form. It is said by some that there is no connection between the two. The theory of the hon. Gentlemen opposite is that, the more taxes you pile upon wealth, the greater the benefit to the working classes. Our theory is exactly the opposite, and we are prepared to confront you, not only with continuous argument on that subject, but we hope, having three or four years of power and authority, to confront you with the proved results of the opposite theory.

Like Reagan, Churchill pointed to the positive results of past tax cuts:

The hon. Gentleman spoke about the relation of the rate of Income Tax to unemployment. He said, “How foolish it is to imagine that by reducing Income Tax you improve employment.” The fact, however, is that the country with the highest rate of direct taxation is also the country with the highest unemployment. That is the fact. It may be a coincidence. But when the Income Tax was reduced by 1 shilling and then by 6d., there was a great improvement. When the Income Tax was 6 shillings in the Pound there were over 2-1/4 million persons unemployed. Now that the Income Tax has been reduced to 4 shillings 6d. in the Pound that figure has fallen to 1-1/4 million people unemployed.

Just as John F. Kennedy justified income tax cuts in the basis that “a rising tide lifts all boats,” Churchill argued that income tax cuts would benefit everyone, not just the rich: “I think, in the time at our disposal, we shall succeed in establishing the soundness of the grounds on which we have acted, and the results which will be effected in the general life of the country by three or four years of steady policy from one broad point of view will be sensibly appreciated by all classes in the State.” Like Reagan, he also argued that income tax cuts were justified because inflation had eroded real incomes: “Quite apart from the increase in the rates of taxation, it is levied on an income which purchases not much more than half what it would have purchased before the War. . . The burden of the Income Tax on the graduated scale has been nearly doubled by the fact that the nominal value of money has so greatly changed.” Churchill’s opponents charged that his fiscal policy amounted to “a rich man’s budget,” the exact phrase Reagan’s opponents used against him. Churchill complained that this was “gross misrepresentation, dishonest misrepresentation.” Reagan made the same protest.

The point is, in no way can Churchill be gamed as a model for the Obamanauts or today’s welfare state. In fact, I’m glad Obama sent the Oval Office Churchill bust back to London. It would soil the memory of the great man if Obama kept it around.

By the way, you can read all about this, and Hayek’s influence on Churchill in the 1940s and 1950s, in one of my books that gets advertised here on the book banner.